Cash Flow Management for Small Business
Cash is the Oxygen of Business
Cash or funds are the lifeblood of a business. How well a business can monitor, analyze and optimize its finances determines its financial health in the short and long term. Cash receipts less cash expenses (net cash receipts) throws light on whether the business is spending more than it is earning. When a business faces an extended shortage of cash, it translates to an inability to pay bills or worse, stay in business.
If your small business is struggling to see a positive cash cycle month after month, here are some tips for managing your cash flow better.
Get paid faster
One of the most important things is to ensure that you receive dues from customers on time. Its operational ability depends to a significant extent on whether its customers take it seriously and pay their invoices in a timely manner. You can offer discounts to customers who pay cash upfront and other incentives to encourage payment of an invoice within the allowed credit period. With cash coming in regularly, you’ll be in a position to meet expenses on time and see an upward trend in your bank balance.
Negotiate for extra credit from the supplier
While finalizing the payment policy with a supplier, negotiate for as extensive a credit period as possible. This is especially important if there are no incentives offered, such as discounts for prompt payment. Also, focus on establishing a strong relationship, based on mutual trust, with each supplier. This will further help you negotiate for credit extensions and discounts.
Inventory is one of the biggest areas where a business’s funds tend to be tied up. It is important to manage inventory at an optimal level. To calculate the amount of cash invested in inventory, compare the inventory balance of the current year with the previous year’s. An increase indicates that there is unsold inventory lying about with your business, which implies a cash outflow. This means you need to take steps to regulate purchase levels so that only an appropriate amount of inventory lies in stock at any given time. Ideally, the level of inventory should be such that maximum profit is generated with the lowest possible investment.
Evaluate your biggest business expenses and accordingly reduce costs. Perhaps you can negotiate with suppliers, let some of your staff go, or get rid of unnecessary utilities and phone expenses. If you wish to keep your finances on a tight leash and have a positive cash flow, you will need to find a way to optimize your business expenses.
Cash flow forecasting
One other method for cash flow management which a small business will find useful is cash flow forecasting. Cash flow forecast consists of estimating when and where cash will flow in and out of the business. Predicting this helps the business understand the funds they will have in hand and the funds required in the future. Some accounting software too will offer the cash flow forecast functionality.
Preapproved loan from financial institutes
It’s important you plan your business’ cash requirements for at least the next one year. Once your cash flow forecast is in place and you realize the need for additional funds, you can either increase overdraft protection or apply for a business loan.
Business tools for cash flow management
Cash flow management is a problem common to most small businesses. Closely tracking cash flow with accounting software or a basic Excel sheet will help you take action ahead of time. You can use a free accounting app like EZO to pay your taxes and monitor financial history in order to run your business better. With Ezo, you can generate professional GST invoices, send them, and track bills. You can also automate repetitive tasks like sending out monthly invoices and reminders to customers. Based on the invoices and GST received, the accounting is reconciled with bank transactions automatically, helping you get a complete view of your cash flow.
Need more expert advice on managing your cash flow? Contact LegalDocs for consultation and run your business better.